Why this Japanese group is the favourite to win Yes Bank's hand
- While SMBC and Emirates NBD balked at the regulatory cap on voting rights in private banks, MUFG, which was earlier keen on buying HDB Financial, does not see the cap as a deal-breaker.
Japan's Mitsubishi UFJ Financial Group (MUFG) has emerged as the favourite to acquire a majority stake in Yes Bank as it is agreeable to the regulatory cap on voting rights in private banks, three people aware of the matter said. Meanwhile, other potential bidders Sumitomo Mitsui Banking Corp. (SMBC) and Emirates NBD see the 26% voting rights cap as a deal-breaker.
"MUFG has started due diligence last week after SMBC and Emirates NBD dropped out due to the Reserve Bank of India's cap on voting rights," one of the three people cited above said.
MUFG is attracted to India's financial services space given its growth prospects, and has hired JP Morgan to advise on the transaction, the second person added. Earlier this year, it was looking to pick up a majority stake in HDFC Bank's subsidiary HDB Financial, a plan that did not bear fruit.
A spokesperson for MUFG declined to comment. Queries emailed to Yes Bank remained unanswered.
Talks crucial for Yes Bank
However, the person cited above said Emirates NBD is not out of the race. “It is awaiting the bid document. But there are several deal-breakers to this discussion," the person said.
Talks with MUFG may be crucial for Yes Bank -- Several potential suitors have dropped out in its search for a new owner spanning more than six months, due to India's banking regulations capping voting rights in any private bank at 26%.
MUFG’s due diligence aims to assess Yes Bank's business to consider an option subsequently to become its new promoter.
“The negotiations are still around a valuation of $8-10 billion," said the second person.
On Thursday, Yes Bank shares fell 2.4% to close at ₹21.88, amid a global equity meltdown triggered by the military conflict in West Asia.
Yes Bank open offer
The second person said MUFG may decide to buy more than 26% in Yes Bank with a voting cap, as mandated by RBI. This is because without buying over 26%, an open offer required to take over Yes Bank as promoter cannot be triggered. The banking and stock market regulators may permit an acquirer to launch an open offer even without buying over 26%, but only under special circumstances.
"Things can work both ways. The options are open for MUFG," said the second person.
Also read | MUFG invests additional $334 million in DMI Finance
Mint reported on 13 September that the Reserve Bank of India has informed SMBC that regulations do not allow a bidder to hold voting rights beyond 26%. SMBC is of the view that without 51% voting share, it will be treated as a mere portfolio investment which is marked to market (M2M), said the report.
According to the third person cited earlier, the issue of voting cap should not be a deal-breaker as the impact due to mark-to-marketing the investments in the equity of the bank may not be significant.
Flat valuation
"Very few niche players may show interest (in Yes Bank) now. However, the valuation of the bank will still be $8-10 billion, at least as of now," said the person, citing the exit of previous bidders.
In the absence of an appropriate promoter, Yes Bank's ability to compete with rivals in terms of products, services or network expansion to speed up growth in advances and deposits has suffered. Also, large domestic banks which had come to the lender's rescue in 2020 by picking up crucial stakes in Yes Bank, are now stuck with neither Yes Bank's shares gaining momentum nor too many large strategic buyers coming forward to buy them out. This, coupled with the restrictions on voting rights, has slowed the stake sale process.
Also read | Sumitomo wanted to take Yes Bank's reins. Will it settle for less?
Yes Bank currently does not have a promoter. Its key shareholders include State Bank of India (23.99%), HDFC Bank Ltd. (2.75%), ICICI Bank Ltd. (2.39%), Kotak Mahindra Bank Ltd. (1.21%), Axis Bank Ltd. (1.01%) and Life Insurance Corp. of India (3.98%).
Even retail shareholders who had purchased Yes Bank shares in hopes of significant investment returns after the 2020 bailout are stuck, since the bank's shares has slipped from ₹25.55 then.
In terms of financial performance, the bank's return on average assets (ROAA) remains weak at 0.5% for Q1FY25 (annualized), lower than its peers. This is due to the drag on interest income from investments in Rural Infrastructure Development Fund (RIDF) to meet priority sector lending shortfall, along with higher funding costs and elevated operating expenses from growing a retail and SME portfolio.
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